Supreme Court clarifies applicability of Arbitration Act, 1996 despite reference to 1940 Act: Purushottam vs. Anil (2018)

Date of the Judgment: May 2, 2018

Citation: (2018) INSC 424

Judges: Arun Mishra, J., Uday Umesh Lalit, J. (authored the judgment)

Can a mere reference to the repealed Arbitration Act of 1940 invalidate an arbitration clause in an agreement made after the Arbitration and Conciliation Act of 1996 came into force? The Supreme Court of India addressed this crucial question in a recent case, clarifying that the intent to arbitrate prevails over incorrect references to repealed laws. This judgment emphasizes the importance of alternative dispute resolution mechanisms and the primacy of the 1996 Act in such cases. The bench comprised Justices Arun Mishra and Uday Umesh Lalit, with Justice Lalit authoring the judgment.

Case Background

The appellant, Purushottam s/o Tulsiram Badwaik, and the respondents, Anil & Ors., entered into a Partnership Agreement on November 9, 2005. This agreement contained an arbitration clause (Clause 15) stipulating that any disputes would be referred to arbitration under the Indian Arbitration Act, 1940. The appellant also executed a Power of Attorney in favor of the partners on December 28, 2006.

In April 2014, the respondents filed a civil suit in the Court of Civil Judge, Senior Division, Bhandara, seeking declarations, damages, accounts, and a permanent injunction against the appellant. Following this, the appellant applied under Section 8 of the Arbitration and Conciliation Act, 1996, to refer the dispute to arbitration, citing Clause 15 of the Partnership Agreement. The Trial Court rejected this application, stating that Clause 15 was vague and did not specify the arbitrator’s selection or the subject matter of the agreement under Section 8 of the 1996 Act.

Timeline

Course of Proceedings

The appellant challenged the Trial Court’s decision by filing a Civil Revision Application in the High Court of Bombay at Nagpur. The High Court upheld the Trial Court’s decision, agreeing that the arbitration clause’s reference to the Indian Arbitration Act, 1940, was problematic, even though the agreement was made after the 1996 Act came into force. The High Court relied on a portion of the Supreme Court’s decision in Thyssen Stahlunion GMBH v. Steel Authority of India Ltd. [ (1999) 9 SCC 334 ] and a decision of the Patna High Court in Rajan Kumar Verma and anr. v. Sachchidanand Singh [AIR 2006 Patna 14]. The High Court noted that if arbitration proceedings had not commenced under the 1940 Act before the 1996 Act came into force, they could not be initiated afterward. It further observed that parties could not agree to the applicability of the 1940 Act after the 1996 Act had come into force. The High Court dismissed the Civil Revision Application.

Legal Framework

The Supreme Court considered the following legal provisions:

• Section 7 of the Arbitration and Conciliation Act, 1996: Defines an “arbitration agreement” as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” It also states that such an agreement must be in writing.
• Section 85 of the Arbitration and Conciliation Act, 1996: This section repeals the Arbitration Act, 1940. However, it also includes a savings clause stating that the 1940 Act would apply to arbitral proceedings commenced before the 1996 Act came into force, unless the parties agreed otherwise. It further states that the 1996 Act would apply to arbitral proceedings commenced on or after the 1996 Act came into force.

Arguments

Appellant’s Arguments:

• The reference to the 1940 Act in the partnership deed should be interpreted as a reference to the arbitration process prevalent at the time of signing the agreement.
• The mention of the 1940 Act should not negate the parties’ intention to use arbitration as a dispute resolution mechanism.

Respondents’ Arguments:

• The question of whether the 1996 Act or the 1940 Act would govern the relationship between the parties was so fundamental that any mistake in this regard would invalidate the entire arbitration clause.
• The courts below were justified in rejecting the appellant’s submissions.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the reference to the Indian Arbitration Act, 1940 in the arbitration clause of the Partnership Agreement, which was entered into after the Arbitration and Conciliation Act, 1996 came into force, would invalidate the arbitration clause itself.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Thyssen Stahlunion GMBH v. Steel Authority of India Ltd. [(1999) 9 SCC 334]: The court clarified that the observations in this case were misconstrued by the High Court. The Supreme Court emphasized that parties cannot agree to the applicability of the 1940 Act for proceedings commenced after the 1996 Act came into force.
• Rajan Kumar Verma and anr. v. Sachchidanand Singh [AIR 2006 Patna 14]: The court clarified that the view taken in this case was not correct and did not note the decision in MMTC Ltd. (Supra). The summary dismissal of the SLP against this decision did not affirm the view taken by the Patna High Court.
• M.M.T.C. Limited v. Sterlite Industries (India) Ltd. [(1996) 6 SCC 716]: The court relied on this case to emphasize that the date of commencement of arbitral proceedings is crucial. If the proceedings commenced after the 1996 Act came into force, the provisions of the 1996 Act would apply. The court also noted that the 1996 Act should be construed to enable the enforcement of earlier arbitration agreements.
• Section 7 of the Arbitration and Conciliation Act, 1996: The court used this section to define the requirements of an arbitration agreement, emphasizing that it must be an agreement in writing to submit to arbitration.
• Section 85 of the Arbitration and Conciliation Act, 1996: The court referred to this section to clarify the repeal of the 1940 Act and the savings clause regarding the applicability of the 1940 Act for proceedings commenced before the 1996 Act came into force.
• Kunhayammed and others v. State of Kerala and another [(2000) 6 SCC 359]: Cited to clarify that summary dismissal of a Special Leave Petition (SLP) does not affirm the view taken by the High Court.
• Indian Oil Corporation Ltd. v. State of Bihar & Ors. [(1986) 4 SCC 146]: Cited to clarify that summary dismissal of a Special Leave Petition (SLP) does not affirm the view taken by the High Court.

The Supreme Court held that the High Court was incorrect in concluding that there could be no arbitration at all. The court emphasized that the primary requirement is an agreement to refer disputes to arbitration, which satisfies Section 7 of the 1996 Act. An incorrect reference to the 1940 Act does not invalidate the entire arbitration agreement. The court stated that such a stipulation must be read in light of Section 85 of the 1996 Act, and the governing principles must be in tune with the 1996 Act. The court observed that the intent of the parties to resolve disputes through alternative dispute resolution mechanisms should be upheld.

The Supreme Court observed, “It would be farfetched to come to the conclusion that there could be no arbitration at all.” It further noted, “Any reference to 1940 Act in the arbitration agreement would be of no consequence and the matter would be referred to arbitration only in terms of 1996 Act consistent with the basic intent of the parties as discernible from the arbitration agreement to refer the disputes to arbitration.” The Court also stated, “An incorrect reference or recital regarding applicability of 1940 Act would not render the entire arbitration agreement invalid.”

The Court also clarified that the view taken by the Patna High Court in Rajan Kumar Verma (Supra) was incorrect as it had not noted the decision in MMTC Ltd. (Supra). The summary dismissal of the SLP against the Patna High Court’s decision did not affirm the view taken by the High Court.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle of upholding the intent of parties to resolve disputes through arbitration. The Court emphasized that the Arbitration and Conciliation Act, 1996, was enacted to promote alternative dispute resolution mechanisms. The Court also focused on the fact that the arbitration agreement, in principle, met the requirements of Section 7 of the 1996 Act. The incorrect reference to the 1940 Act was considered a mere technicality that should not defeat the substantive intent of the parties. The court’s reasoning was also influenced by the need to ensure that arbitration agreements are not easily invalidated on technical grounds, thereby promoting the efficacy of arbitration as a dispute resolution mechanism.

Fact:Law Ratio

Logical Reasoning:

Key Takeaways

• An arbitration clause in an agreement made after the 1996 Act came into force is not invalidated by an incorrect reference to the 1940 Act.
• The Arbitration and Conciliation Act, 1996, applies to arbitral proceedings commenced after its enactment, regardless of references to the 1940 Act in the arbitration agreement.
• Courts must strive to uphold the intent of parties to resolve disputes through arbitration.
• Technicalities should not defeat the substantive intent of the parties to arbitrate.

Directions

The Supreme Court directed the trial court to deal with the matter in terms of Section 8 of the Arbitration and Conciliation Act, 1996. The parties were directed to appear before the trial court on May 14, 2018, to effectuate the arbitration agreement.

Development of Law

The ratio decidendi of this case is that an incorrect reference to the Arbitration Act, 1940, in an arbitration agreement entered into after the Arbitration and Conciliation Act, 1996, came into force, does not invalidate the arbitration agreement. The 1996 Act applies to such agreements, and courts must uphold the parties’ intent to resolve disputes through arbitration. This judgment clarifies that the 1996 Act has primacy in all arbitral proceedings commenced after its enactment, regardless of any references to the repealed 1940 Act in the arbitration agreement. This is a departure from the view that any reference to the 1940 Act would invalidate the arbitration clause.

Conclusion

The Supreme Court’s judgment in Purushottam vs. Anil clarifies that a mere reference to the repealed Arbitration Act of 1940 in an agreement made after the Arbitration and Conciliation Act of 1996 came into force does not invalidate the arbitration clause. The Court emphasized that the intent to arbitrate should prevail, and the 1996 Act should govern such proceedings. This decision reinforces the importance of alternative dispute resolution and ensures that arbitration agreements are not easily invalidated on technical grounds.